US dollar cash generators; geopolitical risk & union power plays

Dino D'Amore
By Dino D'Amore May 31, 2016 16:07

US dollar cash generators; geopolitical risk & union power plays

Today’s headline could be describing the aircraft leasing sector: Leasing companies in China are attracted to the sector for the stable US Dollar income that diversifies risk, while in the USA and Europe it is the opposite as regulators are forcing certain companies to divest the asset rich, but debt heavy leasing operations. To reiterate what has been said here many times before: the aircraft leasing sector development is driven far more by regulatory pressures these days than anything else. So it is that once again the usual suspects are reported to be circling around the next great leasing sell-off from the USA – CIT Commercial Air. HNA Group, ICBC Leasing, Orix Aviation, Century Tokyo Leasing, CDB Leasing, CIC – the whole “possible” list has been quoted over the past few days, which CIT will love.

The reality is that many lessors would like to get their hands on sections of the CIT portfolio rather than simply bid for the whole and that is what is going on. But with GECAS offloading sections of its portfolio at regular intervals, the interest from Japanese lessors indicates that some are sensing a good deal for a slice of the portfolio is possible, which is the primary reason why they would be interested. The Chinese companies motivations are very different, however. Either way, CIT aims to fetch around US$3.5bn for the leasing unit before the end of the year. Taking out some of those larger aircraft from the book or separating off the sections of the narrow-body portfolio is the simple answer to a rapid sell-off given that no-one has come forward with an outright bid during the same period that Avolon, BOC Aviation, NAC, GECAS and others have all managed to attract new investors/buyers.

Tony Fernandes confirmed this week for the first time something that many of us knew to be the case: He has had significant bids for leasing unit Asia Aviation Capital (AAC) in the region of US$1bn. AAC has 43 A320 aircraft on its books and includes PIA among its clients – not what some might call a low risk.  Tony of all people will know that such a valuation is very low compared to what it will be once he has brought in a big industry player to ramp business up rapidly towards $100m of annual cash-flow before any divestment actually does take place. AirAsia shares gained 4.2% to the highest intraday price since March 2015 in Kuala Lumpur after Fernandes made the comments. AirAsia Group shares are up 90% over the past 12 months and there remains value there while AirAsia X is still aligning itself to feed/be fed by other group carriers.

On a global basis, one of the biggest stories of the day is the decision by Air France staff to strike along with rail shipping and other transportation workers as the French nation grapples with mass strikes aimed at preventing changes to labour laws that would bring France partially in line with Germany and the UK but still give workers far more rights. This is significant as the European football championships get underway this Friday and Air France forward bookings indicated the airline stood to make substantial gains in June. Any loss of this revenue will be a big blow to Air France. Thus far airline management have been very strong and clear in their dealings with the unions – it remains to be seen if this stance can be maintained during what could yet become a significant crisis for Air France.

Lastly, on the eve of IATA Dublin, it is well worth considering where the world is in terms of geopolitical risk, which drives airline demand more than anything else. A leading survey of global academics and business leaders published this week has highlighted the primary concerns for each region of the globe and it is these concerns that will most likely drive the debate at IATA Dublin 2016:

North America: Cyber Attack
Latin/South/Central America: Failure of national governance
Europe: Large Scale involuntary migration
Central Asia /Russia: Energy Price Shocks & Interstate conflict
Middle East & North Africa: Unemployment
Sub-Saharan Africa: Failure of National Government
South Asia: Water Crisis
East Asia & Pacific: Extreme weather events and natural catastrophes

The survey reinforces existing and escalating concerns. The low oil prices are creating serious hardships for central Asia/Russia, the Middle East and Latin America and this is leading to the weakening of the government purse in Venezuela, Brazil, Argentina, Russia, Saudi Arabia, Nigeria, Scotland/UK, Bahrain and the Ukraine, to name but a few of the hardest hit nations. This leads to local currency pressures, which in turn hits airline revenues.

As oil prices have fallen, foreign exchange (FX) concerns have taken the top spot as the leading worry for airline managers and in many cases this accounts for the largest single cause of revenue fatigue for many leading airlines. Cyberattacks and other terrorist actions remain the largest area of risk for those airlines currently free from local FX depreciation against the US dollar, namely North American and European airlines. So what should we be worried about?  Aside from war risk, we should be looking for a confluence of FX risk, weakening government revenues and inflation all leading to political instability – The usual mix. This is showing in Latin America, South Africa and Russia more than anywhere else at this time and we can expect domestic air passenger figures for these areas to weaken further throughout 2016.

Dino D'Amore
By Dino D'Amore May 31, 2016 16:07